Are infant formula stocks on a downtrend?

THE A2M MILK COMPANY LIMITED (ASX:A2M)

The A2 Milk Company Limited (ASX:A2M) has delivered some positive news lately, however, weakness in the sector and already high run-up in A2M stock price led to a fall of 18.4% in the past three months. The stock was up 2% on August 13, 2018, market open. Nonetheless, the following are key highlights of recent developments.

Organizational changes

A2M’s Chief Executive, UK and Europe, Scott Wotherspoon, is stepping down post serving the group for about five years to pursue other ventures. While the day-to-day management of the U.K. business is to be assumed in the immediate term by Simon Hennessy, GM International Development, Mr. Wotherspoon  will remain available to assist Mr. Hennessy until September 30, 2018, ahead of the transition to a permanent replacement in coming months.

Anchoring with Fonterra in New Zealand

A2M branded fresh milk has been made available in New Zealand at select stores, while the group will have a broader distribution footprint soon. As of now, A2M and Fonterra Co-operative Group Limited (“Fonterra”) have come under a strategic relation through an exclusive license bestowed to Fonterra for the production, distribution, sale and marketing of the A2M branded fresh milk in New Zealand.

A2M’s revenue surges but higher costs were flagged

A2M’s annual revenue surged up 68 percent but higher costs in the year ahead have been flagged as the group aims to ramp up its business in the dairy-hungry China market. The ratio of underlying earnings to sales would also be flat in FY19 while overhead costs will be higher. A2M expects to spend a greater portion of its revenue on marketing than in fiscal 2018 to continue investing in Australia and to support its expansion in the U.S. The Company also said it would have to spend more on marketing as a percentage of sales in the 2019 financial year as well as incurring higher overhead costs due to increasing headcount in China. Chinese buyers purchasing in New Zealand through informal personal shopper channels known as daigou have fanned A2M's stratospheric success in recent years, but competition has been heating up and the Company faces the challenge of developing a stronger physical retail presence in China. A number of firms including Nestle are launching similar infant formula and child-oriented dairy products free from the A1 protein, a tweak A2M says aids digestion compared to traditional milk.

Introduced Premium A2M Milk™ powder with M?nuka honey

A2M launched a new premium A2M Milk™ powder blended with authentic M?nuka honey. The Company sees potential in the unique and exciting innovation to move ahead with expansion into the thriving adult nutritional powder market for a drink to be enjoyed cold or warm. It was available for sale on June 15 2018 in Australia, New Zealand and through cross border e-commerce channels in China.

Introduced A2M Platinum® Premium pregnancy formula

A2M Platinum® is the first leading infant formula brand to market a maternal milk powder in Australia. Specially formulated to support a mother’s increased nutritional needs from planning a family, throughout her pregnancy and while breastfeeding. This nutritionally advanced A2M Milk™ drink is the only pre, during & post pregnancy formula to contain only the naturally occurring A2M type of the beta-casein protein to the exclusion of the A1 type of beta-casein protein, to help ensure mothers and expectant mothers gain full nourishment from their diet which contains a variety of foods.

BUBS AUSTRALIA LIMITED (ASX:BUB)Â

BUB’s net sales jumped more than 620%

BUB announced that Q4 net sales rose 620 percent to $8.5M when compared with the same time last year. Sales were up 64 percent on the previous quarter. Meantime, export sales to China grew by 644 percent to $1.9M on the prior corresponding period. China sales accounted for 22 percent of the Group’s total quarterly gross revenue. In the quarter, the Company also completed a successful share placement raising $40 million. The Company says they are now an established leader in Australia’s goat-dairy landscape. BUB’s chairman, Dennis Lin, said the capital raise was “heavily oversubscribed” with 53.5 million new shares sold at $0.75 a share.

The group has recently signed up with QianJiaWanPu (QJWP), which is the largest infant formula distributor in the Chinese market place. Initially, a number of brands got approval by the Chinese government, but others have been taking 6 months plus so they are still pending. The vertical integration is going well.

Continues China push with Alibaba, Deloraine Dairy deal

BUB is hoping to gain a further foothold in the lucrative Chinese baby formula market after penning a deal with online giant Alibaba Group, as well as local manufacturer Australia Deloraine Dairy. The deal with Deloraine Dairy allows it to be in a position to gain key certification that will permit BUB to sell Chinese-labeled baby formula into China.

Acquired NuLac Foods

BUB bought NuLac Foods, the owner of the Caprilac and Coach House Dairy food brands and an almost 50 percent share in NuLac’s processing facilities. NuLac has a farm at Yarragon in west Gippsland and a processing plant at Keysborough in Melbourne’s southeast. Chief executive, Nicholas Simms, said “The deal gives BUB an exclusive supply of its key ingredient from one of Australia’s largest goat milk producers as well as supply from New Zealand farms.”

Despite the above news, the stock has fallen about 16% in past one month.

WATTLE HEALTH AUSTRALIA LIMITED (ASX:WHA)

While most of the infant formula stocks have seen a downfall in past few months, WHA was up 18.8% in last one month post a fall of 16% in past three months. The developments attributing to the rise have been enumerated herein below:

WHA’s Gross sales zoom up 71%

WHA’s gross sales for the 2018 financial year, have zoomed up 71%. The group has lately witnessed a transformational quarter and has focused on its vertical integration strategy. There has been 88% rise in cash inflows in Q4 of FY18.

WHA updates on Organic Spray Dryer

WHA said Corio Bay Dairy Group — a joint venture it has with Organic Dairy Farmers of Australia (“ODFA”) and Niche Dairy — had bought land in Geelong to build a dedicated plant for a spray dryer for organic milk powder production. The plant, to be located adjacent to ODFA’s existing dairy factory, is expected to be completed in September 2019.

Chinese approval for sale of milk powder

Shares in WHA jumped nearly 50 percent in three days after the Company announced that it had received Chinese approval for a milk powder product. WHA received approval for sale of 1KG retail bags of its grass-fed milk powder for supermarkets, pharmacies and “bricks and mortar” retail outlets. WHA Executive Chairman, Lazarus Karasavvidis, said, “The approval was an important achievement for the Company, as consumption of milk powders was greater than infant formulas.” Mr. Karasavvidis said Chinese approval for the sale of the milk powder would expand its brand awareness. He said that the move is a part of China market strategy. The group targets $250M in terms of gross sales in five years.

Tapping into rapidly growing Indian market

WHA finalized a 12-month supply agreement with Vasudevan and Sons Exim Private Limited (“VSEP”) in India for supply of WHA’s natural baby food range of products. The initial deal was already made known back in January this year, with the final agreement now made public. Under the agreement, VSEP has committed to buying minimum volumes of WHA’s natural baby food range representing revenue of approximately A$1.5M over the next 12 months. VSEP will initially distribute WHA’s natural baby food range in one state in India and will roll out to the other states.

Expanding infant formula empire in mainland China

WHA) has agreed on a deal with Chinese company Shandong Weihai Port International Trade Co for the supply of Wattle’s conventional cow infant formula range. Shandong is a large products distributor based in north-eastern China with operating revenue of around RMB3.7 B (A$760M) per year, generated across its range of businesses in import, export, logistics, warehousing, sales and distribution.

Wattle Health, Metcash sign baby food range deal

WHA has secured its baby food range in Metcash Trading Limited. The Company said in a statement that the distribution of its baby food range with Metcash will increase brand awareness and drive sales not only of its baby food range, but also its existing range of infant formula.

BELLAMY’S AUSTRALIA LIMITED (ASX:BAL)

The Company is expected to release its preliminary annual report on August 24, 2018, with the final report to follow on September 7, 2018.

Results Update

Highlights from the Company’s 1H18 are outlined below:

In BAL’s opinion, the Company’s turnaround remains on track and the underlying health of the business continues to strengthen. Sales have gained momentum and BAL’s relative share position has improved. They have controlled operating costs, while doubling their marketing investment. Logistics and direct costs have been reset, and the supply-chain restructure is expected to lower future input costs in 2H18.  Inventory has declined and the ageing profile has significantly improved. Operating cash-flow is positive, and BAL is debt free and building a cash reserve. Revenues increased from A$118.3M in 1H17 to A$170.0M in 1H18. Gross margin declined from 39.5% in 1H17 to 37% in 1H18. EBITDA increased from $A19.0M in 1H17 to A$36.3M in 1H18. EBITDA margin increased from 16.1% in 1H17 to 21.4% in 1H18.

The 1H18 results were a new high for revenue and EBITDA, and full-year guidance was upgraded for the core business to 30-35% revenue growth and 20-23% EBITDA margin excluding Camperdown.

However, the uncertainty around the regulatory approvals and other shortcomings led the stock price plunge by 28% in last one month. Â

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